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My nephew just got married. I gave him my usual advice to use a monthly budget. He admitted that he's tried to keep a budget before, but he hasn't ever succeeded in forming a long-term habit of following a spending plan. He asked me to explain what I do each month in my budget meeting so that he could try again anew with his wife.

We were short on time, so I promised to write it up, but as I got started it occurred to me that it could be more powerful if I opened it up to the community for others to give their answers as well. I think there will be some variation in method, but I don't think the topic is too broad to get insightful discussion.

What process do you follow when budgeting each month? Why?

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My wife and I meet in the first few days of each month to create a budget for the coming month. During that meeting we reconcile any spending for the previous month and make sure the amount money in our accounts matches the amount of money in our budget record to the penny. (We use an excel spreadsheet, how you track it matters less than the need to track it and see how much you spent in each category during the previous month.)

After we have have reviewed the previous month's spending, we allocate money we made during that previous month to each of the categories. What categories you track and how granular you are is less important than regularly seeing how much you spend so that you can evaluate whether your spending is really matching your priorities. We keep a running total for each category so if we go over on groceries one month, then the following month we have to add more to bring the category back to black as well as enough for our anticipated needs in the coming month. If there is one category that we are consistently underestimating (or overestimating) we talk about why.

If there are large purchases that we are planning in the coming month, or even in a few months, we talk about them, why we want them, and we talk about how much we're planning to spend. If we want a new TV or to go on a trip, we may start adding money to the category with no plans to spend in the coming month.

The biggest benefit to this process has been that we don't make a lot of impulse purchases, or if we do, they are for small dollar amounts. The simple need to explain what I want and why means I have to put the thought into it myself, and I talk myself out of a lot of purchases during that train of thought. The time spent regularly evaluating what we get for our money has cut waste that wasn't really bringing much happiness. We still buy what we want, but we agree that we want it first.

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